How Do LLC Owners Contract Around Default Statutory Protections?

42 Journal of Corporation Law 503 (2017)

55 Pages Posted: 26 Mar 2016 Last revised: 27 Sep 2017

See all articles by Peter Molk

Peter Molk

University of Florida Levin College of Law

Date Written: March 25, 2016

Abstract

Limited liability companies are built on the idea of contractual freedom. Unlike other business organization forms, most owner protections apply only by default to LLCs, which are free to waive or modify them as desired. This freedom promises economic efficiency if parties are sophisticated but raises the potential for opportunism by relatively more sophisticated managers and majority owners. While companies ranging from small landscape firms to Chrysler and Fidelity organize as LLCs, remarkably little is known about whether or how LLCs use this contractual flexibility.

I analyze the operating agreements of 283 privately owned LLCs organized under Delaware and New York law to determine when and how parties alter default provisions. I find widespread use of LLC statutes’ flexibility to decrease default owner protections, as well as widespread adoption of substitute owner protections that do not apply by default. There is little evidence, however, that the contractual freedom is used to craft more efficient owner protections. Instead, using a proxy for owner vulnerability, I find that LLCs with more vulnerable owners adopt significantly fewer owner safeguards, suggesting that contractual freedom may be used more for opportunism, not systematic efficiency.

Keywords: LLCs, corporations, operating agreement, fiduciary duties, efficiency, bargaining

JEL Classification: K22

Suggested Citation

Molk, Peter, How Do LLC Owners Contract Around Default Statutory Protections? (March 25, 2016). 42 Journal of Corporation Law 503 (2017). Available at SSRN: https://ssrn.com/abstract=2754637

Peter Molk (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

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